No depreciation allowable on BSE membership card post corporatization of BSE

ITO Vs Sino Securities Pvt. Ltd. (ITAT Mumbai) – After hearing both the parties, we find that the issue is covered against the Revenue and in favour of the assessee by the decision of Mumbai “C” Bench of the Tribunal in ITA no.5538/Mum./2009, for assessment year 2006- 07, in ACIT v/s M/s. Omniscient Securities P. Ltd., order dated 16^th March 2011, wherein the Tribunal, vide Para-10, dismissed the ground raised by the Revenue, which reads as follows:-

“10. We have considered the rival submissions. We find that the entire case of the AO is on the premise that in the event of sale of the shares which the assessee acquired on Corporatization and demutualization of BSE as a Company, the assessee would take the benefit of the provisions of section 55(2)(ab) of the Act and claim the cost of acquisition at the price at which the assessee originally paid for acquiring BSE Card ignoring the depreciation on the BSE Card which the assessee availed from the period of acquisition of the BSE Card till exchange of shares for the BSE Card. This apprehension of the AO which has been the basis of protective assessment made in the order of assessment is erroneous because the assessee has sold 6386 shares of BSE Ltd. out of 10000 shares of BEE Ltd., which it had got on Corporatization and demutualization of the BSE as a limited company, in the assessment year 2008-09. While computing capital gain on such transfer the assessee calculated its cost of acquisition on the basis of the written down value and Re. 1 which had paid per share at the time of issue of shares by BSE Ltd. Thus the grievance of the revenue as projected by the AO is found to be non-existent in this case. With regard to the remaining shares of BSE Ltd. which the assessee holds the question of computation of capital gain would continue to be the same basis on which the assessee has computed capital gain in A. Y 2008-9. In view of the above we are of the view that the CIT(A) was justified in deleting the addition made by the AO. The order of the CIT(A) does not call for any interference. Consequently ground No.1 raised by the revenue is dismissed.”

Keeping the aforesaid findings of the Tribunal in view, we dismiss the grounds raised by the Revenue.
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI
Sino Securities Pvt. Ltd. V/s. Income Tax Officer

ITA no. 6264/Mum./2009
(Assessment Year: 2006-07)

 Income Tax Officer V/s Sino Securities Pvt. Ltd.

ITA no. 6394/Mum./2009

 (Assessment Year : 2006-07)

Date of Order – 23.11.2011

ORDER

PER J. SUDHAKAR REDDY, A.M.

These cross appeals are directed against the impugned order dated 23^rd September 2009, passed by the Commissioner (Appeals)-VIII, Mumbai, for assessment year 2006-07.

2. Brief facts of the case are that, the assessee is a company and is engaged in the business of trading in shares and share brooking. In the financial year 2000-01, the assessee company purchased a membership card in the cash segment and derivative segment from Bombay Stock Exchange (for short “BSE”), for a total consideration of 2,50,01,000, and claimed depreciation on the same. The allow-ability of the same is not in dispute in those years in view of the judgement of Honourable Supreme Court in the case of Techno Shares and Stock Ltd. v/s CIT, 193 Taxman 243 (SC).

3. BSE, under the Scheme of “Corporatisation” and “De mutualisation”, was succeeded by a company incorporated under the Companies Act, 1956, under the name and style “Bombay Stock Exchange Limited” (for short “BSEL”). The purpose for which the company was floated was to assist, regulate and control the business of buying, selling or dealing in securities as recognised stock exchange and segregation of ownership right-sand management of the Exchange from the trading rights of the members was contemplated. The assessee was granted 10,000 shares of the newly incorporated company BSEL, as he was an owner of BSE card. The Assessing Officer was of the view that the membership rights of the BSEL does not satisfy the conditions laid down under section 32(i)(b) of the Act for the reasons – (i) all the operations of BSE were taken over by BSEL w.e.f. 19^th August 2005 and each holder of a BSE card given 10,000 shares of the newly incorporated company BSEL; (ii) according to the new scheme, a trading member may or may not be a shareholder and a shareholder may not be a trading member. Hence, he concluded that the trading rights of BSE card got extinguished. The Assessing Officer also observed that new persons can do trading in BSE based on a deposits kept with it, which is similar to the procedure followed by National Stock Exchange. Old members were given certain relaxation with respect to deposits, etc., for the purpose of trading. However, if the trading right is transferred by an erstwhile BSE member to a new member, these relaxations were withdrawn by BSEL. The transferee, in such cases, is a fresh member for all purposes. The Assessing Officer thus, concludes that there is neither any value nor any cost to this trading right; (iii) that the asset i.e., BSE card ceased to exist and the assessee could not continue to claim depreciation on the same on the ground that it still has trading rights; (iv) that BSE card was exchanged in lieu of 10,000 shares of BSEL plus its trading rights. The Scheme of “De mutualization” envisages separation of ownership from trading, and the accumulated reserves of BSE which was an AOP, were transferred to the members in the guise of shares issued at par value of rupees one per share in BSEL; (v) according to section 55(2)(ab) of the Income Tax Act, 1961 (for short “the Act’), cost of acquisition of shares has to be treated as the original cost of acquisition of membership rights and that cost of acquisition of the trading right shall be deemed to be nil; (vi) that most of the share brokers have treated the entire cost of membership of erstwhile BSE as a capital asset and have claimed depreciation under section 32(1)(ii) and such claims have been upheld by the Hon’ble Supreme Court; (vii) that the statute does not provide double deduction in respect of any expenditure incurred and under section 55(2)(ab), the cost of acquisition is treated as original cost, the written down value in the books of account due to grant of depreciation results in double benefit. Thus, the Assessing Officer, vide Para-3.14 of the assessment order, concluded as follows:-

“3.14 In this case, although the written down value as on the date of exchange of BSE Card with shares of BSEL and BSEL trading rights is r 69,21,663. The assessee gets entitled to claim the original cost of the acquisition of membership of BSE i.e. Ps 2,50,01,000/-. Therefore there accrues an excessive benefit to the extent of depreciation aimed and allowed by the ITAT in this year, although this will be realised in the year in which sale is made, In fact it is the direct consequence and incident following from the legal fiction enunciated by Section 55(ab)(supra,). This tantamount to recovering back the allowance of depreciation allowed u/s.41(1)(a) of the Act, amounting to Ps. 1,80,79,337/- (Ps. 2,50,01,000— Ps. 6921663/-).”

4. Alternatively, the Assessing Officer held that no part of the original cost of BSE card can be attributed to the right to conduct trading and, hence, the assessee would not be entitled to the claim of depreciation. The Assessing Officer, at Para-3.18/Page-8 of the assessment order, concluded as follows:-

“3.18 In view of above discussion assessee is not entitled for claim of depreciation in this year also, therefore, the claim of depreciation on BSE card of r 17,30,416 is disallowed for this year. A protective addition of r 1,80,79,337 is being therefore made in this case, as depreciation is denied to the assessee. In case it is finally held that the depreciation on BSE card is allowable the said disallowance would be r 2,50,01,000.”

8. On the issue of dis allowance under section 14A, the Commissioner (Appeals) confirmed the findings of the Assessing Officer.

9. Disallowance made under section 40a(ia) was deleted. Aggrieved, both, the assessee as well as the Revenue are in appeal before the Tribunal.

10. We have heard the learned Counsel, Mr. R.J. Vazirani, on bahalf of the assessee and the learned Departmental Representative, Mr. V.V. Shastri, on behalf of the Revenue. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record, we hold as follows:-

11. We first take up assessee’s appeal in ITA no.6264/Mum./2009.

12. Ground no.1, reads as follows:-

“DEPRECIATION EXCHANGE

On the facts and circumstances of the case and in law, the Commissioner of Income Tax “Appeals-8”, Mumbai (hereinafter referred as the ‘CIT (A)’) erred in confirming the action of the A. 0. in disallowing the depreciation on the Membership Card of Bombay Stock Exchange.

DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT

On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the disallowance of Ps. 4,21,701/- u/s 14A of the Act, as per Rule 8D in respect of total dividend of Ps. 7,72,937/- received by the appellant.”

13. On the issue of depreciation on membership card, the assessee relies on the judgment of the Hon’ble Supreme Court in Techno Shares & Stocks v/s CIT, (2010), 193 Taxman 248 (SC). He submitted that the depreciation was allowed in the earlier years and once the same was held as allowable, the assessee is entitled to the claim, until such time the written down value becomes nil.

14. He submitted that section 55(2)(ab) of the Act, is only on the computation of income from capital gains and has no relevance as far as the grant of depreciation claimed by the assessee under section 32(1)(i) of the Act. Section 2(42A) sub-clause (2)(h)(ha) inserted by the Finance Act, 2003, w.e.f. 1^st April 2004, stipulates that capital assets being equity shares allotted on demutualisation, the period of holding of the capital assets shall include the period for which the person was a member of BSE and that this section also is concerned with the computation of capital gain only. He contends that there appears to be a lacuna in the Act which unintentionally provided double benefit to the assessee. The Hon’ble Supreme Court has held that BSE membership card falls within the definition of intangible asset and is eligible for depreciation and whereas for the purpose of computation of capital gains, the original cost of membership is considered and the period of holding would be reckoned from the date of acquisition of the original BSE card. He submitted that the assessee gets double benefit.

15. However, learned Counsel pointed out that the assessee, in the present case, has not claimed any double benefit since it has offered short term capital gains of 2,37,17,383, in respect of 4,562 shares sold by them during the assessment year 2008-09 and instead of applying the provisions of section 55(2)(ab) r/w section 2(42A)(h)(ha), the assessee has taken the cost at rupees one per share and the period of holding as short term. He further submitted that the language of the statute is clear and unambiguous and, hence, provisions must be interpreted accordingly. He relied on the following case laws:-

• CIT v/s Sodra Devi/Damayanti Sohni v/s CIT, 32 ITR 165 (SC);
• CIT v/s Indian Bank Ltd., 56 ITR 77 (SC); and
• CIT v/s Ajax Products Ltd., 55 ITR 741 (SC).

16. Learned Counsel for the assessee also relied on the judgment of Hon’ble Supreme Court in CIT v/s Vegetable Products Ltd., 88 ITR 192 (SC), for the proposition that rule of beneficial construction to the assessee must be adopted.

17. On the disallowance under section 14A, learned Counsel submitted that the assessee is trading in shares and as such dividend received is a byproduct of this activity in dealing in shares and that the assessee has not incurred any direct or indirect expenditure for earning dividend and, hence, no disallowance should be made under section 14A.

18. Learned Departmental Representative relied on the orders of the authorities below and submitted that consequent to demutualization and corporatisation, the assessee was granted 10,000 shares in the new company BSEL, as well as a right to trade subject to fulfillment of certain conditions such as making deposits, etc. He emphasized that any person could trade in BSEL subject to payment of a deposit and the right of the assessee was not an exclusive right and it was not connected or linked with his being a shareholder in BSEL. Thus, he submitted that the entire stock of the BSE Card is attributable to the acquisition of 10,000 equity shares in BSEL and no part thereof can be assigned to the trading rights. He pointed out that the shares in BSEL had a high intrinsic value because of accumulated reserves and surplus. Hence, he submitted that the right of trading cannot be considered as having any value, much less written down value and, hence, question of grant of depreciation on such nil value does not arise. He relied on the provisions of section 55(2)(ab) of the Act.

19. On the issue of disallowance under section 14A of the Act, the learned Departmental Representative submitted that section 14A, does not provide for any exception and if exempt income is earned, the expenditure incurred in relation to income should also be excluded.

20. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, as well as the case laws cited before us, we hold as follows:~

21. The first issue is, whether the assessee is entitled to depreciation on the WDV of the erstwhile BSE card after becoming a member of BSEL. The assessee, consequent to demutualization, has acquired two separate rights in new company BSEL. These rights are – (i) ownership rights and (ii) trading rights.

22. These assets are held as a consequence to the assessee being a BSE membership cardholder. The Hon’ble Supreme Court in Techno Shares and Stock Ltd. (supra) held that the BSE membership card conferred certain rights to the members in terms of rules and bylaws of BSE, as they stood during the relevant years, and that this was a business in commercial right. Paras-19 and 25 of the judgment of Hon’ble Supreme Court in Techno Shares and Stocks Ltd. (supra), reads as follows:-

“19. The next question is – whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of Section 32(1)(ii). Our answer is in the affirmative for the reason that the Rules and the Bye-laws hereinabove indicate that the right of membership (including the right of nomination) vests in the Exchange only when a member commits default. Otherwise, he continues to participate in the trading session on the floor of the Exchange; that he continues to deal with other members of the Exchange and even has the right to nominate subject to compliance of the Rules. Moreover, by virtue of Explanation 3 to Section 32(1) (ii) the commercial or business right which is similar to a “licence” or “franchise” is declared to be an intangible asset. Moreover, under Rule 5 membership is a personal permission from the Exchange which is nothing but a “licence” which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of. Membership which is a “licence” or “akin to a licence” which is one of the items which falls in Section 32(1) (ii) of the 1961 Act The right to participate in the market has an economic and money value It is an expense incurred by the assessee which satisfies the test :::of. being a “licence” or “any other :business or commercial right of similar nature” in terms of Section 32(1)(ii).

24. Before concluding, we wish to clarify that our present judgment is strictly confined to the right of membership conferred upon the  member under the BSE membership card during the relevant assessment years. We hold that the said right of membership is a “business or commercial right” which gives a non-defaulting continuing member a right to access the Exchange and to participate therein and in that sense it is a licence or akin to licence in terms of section 32(1)(ii) of the 1961 Act. That, such a right vests in the Exchange only on default / demise in terms of the Rules and Bye-laws of BSE, as they stood at the relevant time. Our judgment should not be understood to mean that every business or commercial right would constitute a “licence”or a “franchise”in terms of Section 32(1) (ii) of the 1961 Act.“[emphasis added]

23. The question before us is whether this right i.e., “the rights conferred upon the members as a BSE membership cardholder” which was held to be a depreciable asset, continues to be held in the same form by the assessee. The judgment of Hon’ble Supreme Court, as it is clear, does not extend to the current assessment year. This right as a BSE membership card holder has undergone a change consequent to corporatization and demutualization of BSE. The rights in question are not held in the same form.

24. To understand “corporatization”and “demutualization”of Stock Exchange, we extract certain portions of the group report for ready reference:-

“Report of the Group on Corporatisation & Demutualisation of Stock Exchanges

1. Introduction

1.1 The Government had announced its proposal to corporatise the stock exchanges by which ownership, management and trading rights would be segregated from each other and legislative changes, if required, would be proposed accordingly to give effect to the corporatisation and demutualisation of stock exchanges. The Finance Minister has also emphasized in his Budget Speech for the year 2002 -03 that this process would be completed during the course of the year to implement the decision to separate ownership, management and operation of the stock exchanges.

Demutualisation – the new governance structure

5.6 This redefinition of the roles and the new paradigm of competition, forced changes in the traditional governance structures of stock exchanges. Countries responded to these pressures by converting their traditional “not for-profit” stock exchanges into a “for profit” company. This process of transition from “mutually-owned” association to a company “owned by shareholders”, in other words transforming the legal structure from a mutual form to a business corporation form and privatising the corporations so constituted, is referred to as demutualisation. Further, the company so constituted may choose to be a listed or an unlisted, closely held public company. The concept of demutualisation can be applied to any “non-profit” organisation or association as well.

a. the right to participate in the ownership of the assets of the stock exchange, and
b. the right to trade on the stock exchange.9.8 This decoupling of the two rights would have to be effected through the cancellation of the card against a consideration of creation  of two assets or two rights – one, an interest in the assets of the stock exchange and the other interest in the trading right. The interest in  the asset is created by issuance of shares in the new entity in lieu of the consideration of extinguishment of cards currently owned by the  members in the mutual entity. Internationally also, stock exchanges have followed the same procedure for demutualisation. The manner in which the interest in the trading rights would be created is discussed in paragraphs 9.20 to 9.22 of this report.

9.9 At the point of time, when a trading right is acquired, and a share is allotted to a member of an stock exchange by virtue of which he acquires a membership privilege against the extinguishment of the previous right of membership, no transfer of assets effectively takes place and neither of the acquisitions should therefore be deemed to be a transfer within the meaning of the word in the Income Tax Act. However, at the point of sale of any of these two rights, capital gains  tax would be attracted. This would also imply that the cost of acquisition would have to be split and valued. The manner in which this could be done has been elaborated in Paragraph 9.22 of this report.

Segregation of trading rights and ownership

9.19 For the purpose of segregation of ownership and trading rights, the Group examined the present systems of membership prevailing in the stock exchanges in the country. It was noted that except for NSE, which offers trading rights against deposits, all other stock exchanges have the concept of membership cards for their members. In some stock exchanges e.g. BSE, the trading right is exercised through the ownership of a trading card, which subject to BSE’s approval can be transferred for a consideration. Cards can be sold by members and also by the stock exchange when new members are introduced.

9.20 The representations received by the Group from the stock exchanges, brokers’ association and investors’ association suggest that there are several advantages in the deposit system as opposed to the card system. The major advantages are:-

a)  the trading card system be replaced by the deposit system wherein  the money deposited by the member to obtain trading rights only, be  considered as deposit with the stock exchange for trading purpose. While the Group favors the deposit system, it would like to leave the choice of adopting either the card or the deposit system to the stock exchanges; and

b) the following procedures be adopted if the deposit system is accepted by an stock exchange for the purpose of segregation of the trading rights and ownership. As an illustration only, some figures have been assumed.

Members of an stock exchange currently own an asset viz. a card whose value can be assessed on two different parameters viz.: –

iii. Based on the above, a value of the card can be determined.

The value of the card represents the aggregate value of two independent rights of the holder viz.

(a)   the right to a share in the net assets and goodwill of the stock exchange and

(b)   the right to trade on the stock exchange.

Since trading rights are in future to be made conditional on the  placement of a deposit with the stock exchange and such deposit will also be collected from new members, the amount of such deposit may be considered as the value of the right to trade and the excess of the  fair value of the card over that amount may be considered as the value  of the right to share in the net assets and goodwill of the stock exchange.

Assuming purely for the purpose of illustration, that the value of a card is determined at Ps. 125 lakh and the amount of deposit at Ps. 75 lakh the value of the card can be apportioned as under :-

(a)	Value of share in net assets and goodwill of the stock exchange	Ps. 50 lakh
(b)	Value of trading rights	Ps. 75 lakh
		Ps.125 lakh

 The stock exchange will therefore issue to each member, on cancellation of the card, shares, which have an aggregate value of Ps. 50 lakh and a deposit receipt of Ps. 75 lakh. The shares may be issued at par or at premium as may be considered appropriate.

In the books of the stock exchange, the aggregate value of the shares issued and deposit receipts issued will represent the total consideration. The excess of total consideration over the book value of the net assets will represent goodwill and will be recorded as such. Goodwill will have to be written off over a specified period say 20 years.

A trading member can liquidate a part of his investment by selling all or part of the share capital. However, so long as he remains a trading member he has to retain the deposit.

If the member wishes to terminate his membership, he can demand refund of the deposit but in order to ensure the liquidity of the stock exchange, there should be an initial “lock-in” period of three years and thereafter such “lock-in” period as the stock exchange may stipulate to provide assurance against non-notified claims.

Relevant portion of the notification of SEBI in this regard is extracted below for ready reference:-‘

SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION
Mumbai, the 20^th May, 2005

SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI

ORDER UNDER SECTION 4B (6) READ WITH SECTION 4B (7) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 IN THE MATTER OF THE BSE (CORPORA TISATION AND DEMUTUALISATION) SCHEME, 2005.

S. O. 684(E). 1.0 BSE (also known as ‘The Stock Exchange, Mumbai^@) is an Association of Persons and a recognised stock exchange having its principal place of business at Phiroze Jeejeebhoy Towers, Dalal Street, Fort, Mumbai 400 001. It is required to be corporatised and demutualised under the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as ‘the SC(R)A^@).

3. Incorporation of Bombay Stock Exchange Limited

3.1 The First Shareholders shall incorporate a public company limited by shares under section 12 of the Companies Act, 1956 in the name and style of “Bombay Stock Exchange Limited”.

3.2 The First Shareholders shall each subscribe to and pay for 10,000 fully paid-up equity shares of the face value of Re. 1/- each for cash at par of Bombay Stock Exchange Limited.

8.1 A Member or a Limited Trading Member of BSE, who is registered as a stock broker on the day preceding the Due Date shall become a Trading Member of the Cash Segment of Bombay Stock Exchange Limited on the Due Date;

8.2 A Member who is not registered as a stock broker on the day preceding the Due Date shall become a Trading Member of the Cash Segment of Bombay Stock Exchange Limited on being registered as a stock broker under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 within 3 months from the Due date.

8.3 A Trading Member and/or a Clearing Member of the Derivatives Segment of BSE on the day preceding the Due Date shall become a Trading Member and/or a Clearing Member of the Derivatives Segment of Bombay Stock Exchange Limited on the Due date.

8.4 After the Due Date, a person desirous of becoming a Trading Member of any segment of Bombay Stock Exchange Limited shall be admitted if he complies with requirements and brings in specified fees and deposits as specified in the Rules, Bye-laws and Regulations of Bombay Stock Exchange Limited.

8.5 Bombay Stock Exchange Limited shall, for the purpose of admitting any person as a Trading Member of a segment, follow uniform  standards in terms of capital adequacy, deposits, fees etc. irrespective of mode of acquisition of trading right by that person:

Provided that different standards may be followed for admission of a  person as a Trading Member who has acquired trading right by way of transmission;

Provided further that different standards may be followed for admission of Trading Members in different segments.

8.6 A Trading Member may surrender his membership of any segment to Bombay Stock Exchange Limited in the manner specified in the Rules, Bye-laws and Regulations of Bombay Stock Exchange Limited

8.7 Trading Members of the Cash Segment of Bombay Stock Exchange Limited and the Clearing Members of the Derivatives Segment of Bombay Stock Exchange Limited shall clear and settle trades respectively till the clearing and settlement function is transferred to a recognized clearing corporation under clause 13.1 of this Scheme.

8.8 Irrespective of the date or mode of acquisition of trading right, the Trading Members in a segment of Bombay Stock Exchange Limited shall have uniform rights and privileges. 

Provided that Bombay Stock Exchange Limited may, with the prior approval of SEBI, grant additional privileges to those Trading Members who were Members on the day preceding the Due Date.

8.9 Trading Members of Bombay Stock Exchange Limited on the Due Date shall continue to have the same rights and privileges in respect of their clients and constituents and other members arising out of or under any act, omission or contract or law, notification, order, direction, etc. as had accrued to them while being Members or Limited Trading Members of BSE or Trading Members and or Clearing Member of Derivative Segment of BSE on or before the Due Date.

8.10 Trading Members of Bombay Stock Exchange Limited shall be bound by all obligations and liabilities towards their clients and constituents, SEBI, BSE and other authorities or other persons arising out of or under any act, omission or contract or law, notification, order, direction, etc. while being Members or Limited Trading Members of BSE or Trading Members and or Clearing Members of Derivative Segment of BSE on or before the Due Date.”

25. From the above, following conclusions can be drawn.

i)          BSE which was a voluntary, not for profit character of entity, got converted into a “for profit” and corporate activity;

ii)        BSE membership card is cancelled and the twin rights that a holder of BSE cardholder had got separated into the following independent rights – (a) ownership rights and (b) trading rights.

iii)       The previous rights of a BSE membership cardholder gets extinguished and in lieu thereof the BSE member acquires shares in BSEL and trading rights in BSEL;

iv)       Under section 47(xiiia), such extinguishment of rights and acquisition of shares and trading rights in BSEL is not regarded as transfer.

v)       That cost of acquisition of ownership rights and trading rights would have to be split and valued on transmission.

vi)      Trading rights are based as deposit system as opposed to card system;

ii)               The trading card system is replaced by the deposit system;

viii)   The money deposit by the member to obtain trading rights, is be considered as a deposit with stock exchange for trading purpose;

ix)       Value of ownership right shall be the share in the net assets and goodwill of the stock exchange;

x)         The value of deposit placed to obtain trading rights will be the value of the right to trade;

xi)       A trading member has to retain the deposit as long as he trades. If a trading member wishes to terminate his membership, he can demand refund of deposit.

28.    Coming to the trading rights, the report of the Group on corporatization and demutualization of Stock Exchange fixed the value as equivalent to the deposit requirement. The trading right is a business and commercial rights of similar nature under section 32(1)(ii) of the Act.

29. The business and commercial rights of similar nature held by the assessee as a holder of the membership card of the erstwhile BSE no longer exists. The same got extinguished. Hence, we are of the considered opinion that the Assessing Officer was right in holding that no depreciation can be granted on the written down value of the BSE membership card. At best, the claim for depreciation can be on a trading right of the members, which is newly acquired, which aspect we will discuss hereafter.

30. As we have noticed, the group on corporatisation and demutualization of Stock Exchanges has suggested the manner of valuation of ownership rights and trading rights. It was recommended that the value of trading rights be fixed at the amount of deposit that was required for acquiring trading rights. The value of the BSE card to the extent allocable or attributable to ownership rights, can be said to have been transmitted by way of allotment of shares in BSEL. The value is to be determined by the underlying value of assets of BSEL or through some other approved method.

31. Coming to trading rights, we find that the value that can be assigned from out of the value of BSE card is only to the extent of deposit made. Trading right is no doubt a business in commercial rights but value is equivalent to the quantum of deposit. The assessee is entitled to refund of the deposit. When the value is equal to a refundable deposit, how can such value of refundable deposit be depreciated when the value in reality does not come down. If the refundable deposit is deducted from the value, then the present value of trading right is nil. Under these circumstances, there is no value to the trading in commercial right entitling the assessee for deduction by way of depreciation. Hence, no depreciation can be granted on this right. Thus, we uphold the finding of the Revenue authorities. We now discuss the impact of the following sections:-

 “55(2) For the purposes of sections 48 and 49, “cost of acquisition”,—

(ab) In relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for demutualisation or corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992, (15 of 1992) shall be the cost of acquisition of his original membership of the exchange.

Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil.

2(42)(h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation.

(ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation] 113c[(hb) in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares.

47(xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company:]

Provided that—

(a)          all the assets and liabilities of the firm [or of the association of persons or body of individuals] relating to the business immediately before the succession become the assets and liabilities of the company;

(b)          all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;

(c)          the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and

(d)       the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;

(e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);]

47(xiiia) any transfer of a capital asset being a membership right held by a member of a recognised stock exchange in India for acquisition of shares and trading or clearing rights acquired by such member in that recognised stock exchange in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);]

32. All these sections deal with computation of capital gains under Chapter-IV(E) i.e., section 45 to 55A of the Act. In our considered opinion, these sections which are for the computation of capital gains, have no relevance on the allowability of depreciation. The argument of the assessee that it had taken the original cost of the share @ 1, while computing capital gain in a latter year, does not effect our decision. Thus, we uphold the order of the Assessing Officer as confirmed by the Commissioner (Appeals) wherein depreciation on membership card has been denied.

33. Coming to disallowance under section 14A, the argument of the assessee that this is incidental income and that it has not incurred any direct or indirect expenditure is not in accordance with law. The Hon’ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v/s DCIT, (2010), 328 ITR 081 (Bom.), has held that Rule-8D cannot be applied retrospectively. As in the current year, Rule-8D cannot be applied, we set aside the impugned order passed by the Commissioner (Appeals) and restore the matter back to the file of Assessing Officer for disallowing reasonable amount in accordance with law.

33. In the result, assessee’s appeal is partly allowed.

34. We now take up Revenue’s appeal in ITA no.6934/Mum./2009. Ground no.1, reads as follows:-

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.1,80,79,337/- made on account of protective addition on BSE Card.

2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in ignoring the provision of section 41(1) and 28(iv) of the Income-tax Act.”

36. After hearing both the parties, we find that the issue is covered against the Revenue and in favour of the assessee by the decision of Mumbai “C” Bench of the Tribunal in ITA no.5538/Mum./2009, for assessment year 2006- 07, in ACIT v/s M/s. Omniscient Securities P. Ltd., order dated 16^th March 2011, wherein the Tribunal, vide Para-10, dismissed the ground raised by the Revenue, which reads as follows:-

“10. We have considered the rival submissions. We find that the entire case of the AO is on the premise that in the event of sale of the shares which the assessee acquired on Corporatization and demutualization of BSE as a Company, the assessee would take the benefit of the provisions of section 55(2)(ab) of the Act and claim the cost of acquisition at the price at which the assessee originally paid for acquiring BSE Card ignoring the depreciation on the BSE Card which the assessee availed from the period of acquisition of the BSE Card till exchange of shares for the BSE Card. This apprehension of the AO which has been the basis of protective assessment made in the order of assessment is erroneous because the assessee has sold 6386 shares of BSE Ltd. out of 10000 shares of BEE Ltd., which it had got on Corporatization and demutualization of the BSE as a limited company, in the assessment year 2008-09. While computing capital gain on such transfer the assessee calculated its cost of acquisition on the basis of the written down value and Re. 1 which had paid per share at the time of issue of shares by BSE Ltd. Thus the grievance of the revenue as projected by the AO is found to be non-existent in this case. With regard to the remaining shares of BSE Ltd. which the assessee holds the question of computation of capital gain would continue to be the same basis on which the assessee has computed capital gain in A. Y 2008-9. In view of the above we are of the view that the CIT(A) was justified in deleting the addition made by the AO. The order of the CIT(A) does not call for any interference. Consequently ground No.1 raised by the revenue is dismissed.”

37. Keeping the aforesaid findings of the Tribunal in view, we dismiss the grounds raised by the Revenue.

38. Ground no.3, reads as follows:-

“3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in giving relief on account of transaction charges as payments made on account of transaction charges are technical services within the purview of Sec. 194J and therefore liable for deduction of tax.”

39. The Hon’ble Jurisdictional High Court in CIT v/s Kotak Securities Ltd. in ITA no.3111/2009, judgment dated 21^stOctober 2011, held that transaction charges paid to BSE is fees for technical services under section 1943. The Hon’ble Court reversed the decision of the Tribunal and held as follows:-

“The assessee’s argument, based on Skycell Communications v/s DCIT 251 ITR 53 (Mad), that the stock exchange does not render “managerial or technical services” is not acceptable because while in that case the subscriber had paid a fixed amount for the use of air time on the mobile phone and was not concerned with the technology or the services rendered by the managerial staff in keeping the cellular mobile phone activated, in the case of a stock exchange, there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the BSE is a complete platform for trading in securities. A stock exchange manages the entire trading activity carried on by its members and accordingly renders “managerial services”. Conse­quently, the transaction charges constituted “fees for technical services” u/s 194-I and the assessee ought to have deducted TDS. However, on facts, because from 1995 to 2005 no tax was deducted and no objection was raised by the AO and because from AY 2006-07 onwards the assessee had deducted TDS, no disallowance u/s 40(a)(i) can be made forAY 2005-06.”

40. Respectfully following the aforesaid judgment, we allow this ground raised by the Revenue.